Friday, September 28, 2012

St. Louis Fed President James Bullard just delivered a speech where he claims that U.S. monetary policy has been stellar over the past four years. In fact, he says monetary policy was "close to optimal." Yes, I about chocked too after reading that line. His view is that (1) the Fed kept the price level on its long run trend and that (2) there was a reduction in U.S. potential output that undermines that case for looking at NGDP being below trend. Consequently, there is nothing to the claims of insufficient aggregate demand. It is all structural, end of the story.

This is not the first time Bullard has made claim (2), but it is the first time he has combined it with the claim that the Fed has been doing a fine job since 2008. Scott Sumner has already responded and I am sure others will too. My response to Bullard is that your theory cannot explain an important development that have been ongoing since 2008: the elevated demand for liquidity. If we are simply on a new growth path and the Fed has done a fine job with monetary conditions, then why is the demand for safe assets still so pronounced? Below are five facts about this ongoing demand for liquidity:

Fact 1

Households and other retail investors have been increasing their holdings of FDIC-protected saving deposits at an usually rapid rate. This surge in saving deposit growth starts during the crisis in 2008 and still is growing. Since that time, households have acquired almost $2.4 trillion worth of saving deposits.

Fact 2

Households have been one of the biggest purchasers of U.S. treasuries over the past 4 years. Through direct purchases, households have gone from holding $264 billion in 2007:Q4 to $1.3 trillion in 2012:Q1. If mutual funds purchases of treasuries reflect indirect household purchases, then household holdings have grown from $647 billion in 2007:Q4 to $2.2 trillion in 2012:Q1. This is more than double the Fed's increase in treasury holdings. Only foreigners have bought more. (Update: these numbers were based on SIFMA data thru 2012:Q1. The Q2 data shows major revisions such that direct household holdings went from $202 billion in 2007:Q4 to $878 billion in 2012:Q2. Including mutual fund purchasers of treasuries put household holdings at $584 billion in 2007:Q4 and $1810 billion in 2012:Q2. These combined purchasers are still more than the Fed's, but not double. Interestingly, these revision show the Fed's holdings at about 15% of total marketable treasuries. So much for the Fed buying up all the deficit)

Fact 3

Household holdings of liquid assets as a percent of total assets soared in 2008 and have yet to come down. Household porfolios, therefore, are still inordinately weighted toward safe, liquid assets and have yet to undergo the type of portfolio rebalancing associated with a robust recovery (i.e. a rebalancing of portfolios away from low yielding, liquid assets to higher yielding, riskier assets will spawn indirect effects on aggregate nominal spending via balance sheet and wealth effects and directly through purchases on capital. See here for evidence on this portfolio channel).

Fact 4

Interest rates on safe assets are at historical lows. Given the facts 1-3 above, it should be evident that these low interest rates are the result of an elevated, ongoing demand for safe assets. As noted above, the biggest purchasers of U.S. treasuries has not been the Fed over the past four years. So don't blame the Fed.

Fact 5

Since the start of the crisis in 2008, movements in the stock market and expected inflation have been highly correlated as seen here. This is an unusual relationship that only started during the crisis and continues to this day. Thus, whatever caused it to happen in 2008 is still with us today. The easiest interpretation that is consistent with facts 1-4 above is that spike in demand for safe, liquid assets that began in 2008 has yet to subside. Here is why: any rise in expected inflation that would reduce this intense demand for liquid assets and thereby raise the expected future nominal income, would also raise expectations of higher future stock prices. In anticipation of this development, investors buy stocks in the present (see David Glasner). Thus, expected inflation and stock prices are currently related. Since liquidity demand still remains elevated, there apparently hast not been a big enough increase in expected future nominal income to break this relationship.

Those are the facts. They all indicate there is still an elevated demand for liquidity that is slowing the economy. Now here is the thing. By changing expectations about the path of future nominal income, the Fed could reduce this demand for liquidity and spark a recovery in nominal expenditures. Specifically, by setting a NGDP level target, the Fed could increase both the certainty and expected amount of future nominal income. This would increase demand for credit today and kick start the private creation of safe assets. It also would decrease the demand for safe assets. That the Fed has not done this and, as a result, there is still elevated liquidity demand screams Fed failure, not success.

Now this is not to say there are no structural problems. Only that there still remains a sizable excess demand for liquidity that is constraining aggregate nominal spending. My hope is that James Bullard and others who share his views will wrestle with these facts that point to this safe asset demand problem.

Wednesday, September 26, 2012

I fear an alien life force has taken over our dear friend Tyler Cowen. Or, maybe it is just his evil twin Tyrone pretending to be Tyler on his blog. Either way, the real Tyler Cowen would never have written this post. For it contains some really head-scratching statements on nominal GDP targeting. Probably the most puzzling one is this:

I get nervous at how ngdp lumps together real and nominal in one variable, and I get nervous at how the passive voice is applied to ngdp.

What? I about fell out of my chair when reading this. Mark Sadowski did too and had this to say:

No, NGDP is *all* nominal. That’s why it has the “nominal” in front. RGDP is an artificial concept requiring that we estimate an index of the aggregate price level.

Amen! The occasional, if tacit, treatment of NGDP as a value that is “derived” by taking the product of two directly observable magnitudes, real output and the price level, is as mischievous as it is wrong. We must understand the behavior of both P and y to depend, the first in the long run and the second in the short run, on that of Py, rather than the other way around. That is why it is also important to insist that stabilizing NGDP is not just a rough-and-ready way of minimizing a loss function in which fluctuations of P and Y are separable components. No and no again: if the natural rate of y plummets (natural disaster or war, say), what is desirable is not that we should minimize both P and y movements subject to the supply-shock “constraint. It is rather than we should see P move the opposite way from y, which is done by stabilizing Py level.

The other really puzzling statement made in the Tyler Cowen post was this one.

My framing is different. My framing is that the private sector can manufacture its own ngdp. It can do so by trade and it can do so by credit and of course velocity is endogenous to the available gains from trade...

To say “ngdp is low,” or “ngdp is on a low growth path,” or “ngdp is below trend,” and so on — be very careful! Those claims do not necessarily have causal force. Arguably they are simply repeating, in a new and somewhat different language, the point that the private sector has not seen fit to engage in more trade, credit creation, velocity acceleration, and so on. Formally speaking, the claims are not wrong, but I don’t find them useful as an explanation for why economic growth or recovery, at some point in time, is slow. It is one way of repeating or re-expressing the slowness of economic growth, albeit with some transforms applied to the vocabulary of variables.

Sorry, but the whole point of NGDP level targeting is to catalyze the private sector into a sustained expansion by changing their expectations about the future path of nominal income. If done right, households and firms would do the heavy lifting, not the Fed. This a point I and other Market Monetarist have made many times. For example, here is an excerpt from a post I did earlier this year:

Now imagine how the public would respond if tomorrow Ben Bernanke called a press conference and announced the Fed was adopting this new monetary regime. This announcement would send shock waves through the markets. Portfolios would automatically adjust toward riskier assets in anticipation of the Fed actually doing these conditional LSAPs. This would raise asset prices and raised expectations of future nominal income growth. Current aggregate nominal spending would respond to these developments, helping push NGDP to its targeted path and thus reduce the onus on the Fedto do LSAPs. In short, a conditional LSAP program tied to an explicit NGDP level target would be a significantly different and far more effective monetary program than any of the LSAPs the Fed has tried so far.

And here is an example from early 2011 where I explain a NGDP level target would solve a coordination problem where no household or firm wants to be the first mover in a deleveraging economy:

deleveraging is a drag on the economy, but for every debtor deleveraging there is a creditor getting more payments. (And if the debtor is not making payments and defaulting then the debtor still has funds to spend.) In principle the creditor should increase their spending to offset the debtor's drop in spending. The reason they don't--creditors sit on their newly acquired funds from the debtor instead of spending them--is because they too are uncertain about the economy. There is a massive coordination failure, all the creditors are sitting on the sideline not wanting to be the first one to put money back to use. If something could simultaneously change the outlook of the creditors and get to them to all start using their money at the same time then a recovery would take hold. Enter monetary policy and its ability to shape nominal spending expectations.

Again, the point is to catalyze the private sector into jump starting a robust NGDP recovery. Finally, we do have a causal story here, it is called an ongoing excess money demand problem that has kept NGDP below trend. My previous post provides ample evidence for this view. My hope is that alien-infested Tyler or Tyrone will wrap his minds around these points and be scared off. We need the real Tyler Cowen to return.

Monday, September 24, 2012

Scott Sumner told us in September 2009 that "the real problem was nominal," that is, the recession and its high unemployment were primarily due to an unsatisfied excess demand for money (combined with real effects on debt burdens of nominal income being below its previous path)...Market Monetarists who have been celebrating the Fed’s recent announcement of open-ended monetary expansion ("QE3') seem to believe that Sumner’s 2009 diagnosis still applies. But what is the evidence for believing that there is still, three years later, an unsatisfied excess demand for money? ...If the evidence for thinking that there is still an unsatisfied excess demand for money is simply that we’re having a weak recovery, then as Eli Dourado has pointed out, this is assuming what needs to be proved.

Larry's question is understandable since it has been so many years since the crisis first erupted. George Selgin, Steve Horwitz, Eli Dourado, Tyler Cowen, and others have raised this objection before so it is a common one. This objection, however, is unwarranted since there is plenty of evidence that there still remains excess money demand. Before presenting the evidence, there are several points worth noting in this debate.

Sunday, September 23, 2012

Fed
chair Ben Bernanke kept policy far too tight after the US economy
buckled in early to mid 2008. He allowed a collapse in the money supply
to run unchecked, causing avoidable disasters at Fannie, Freddie,
Lehman, and AIG later that year.

Call it the "Bernanke
Depression" if you want, a term gaining traction in elite circles. The
indictment is a little unfair. The European Central Bank was worse. It
raised rates into a deflationary oil shock in August 2008, and worsened a
run on the dollar that constrained Fed actions.

There was little
that Bernanke could do about the deeper causes of the crisis, whether
the `Savings Glut' of Asia and North Europe, the `China Effect', the $10
trillion reserve accumulation by the world's rising powers.

Yet
three heavyweight books now lay the blame squarely on the Fed: the
'Great Recession' by Robert Hetzel, a top insider at the Richmond Fed;
'Money in a Free Society' by Tim Congdon from International Monetary
Research; and 'Boom and Bust Banking: The Causes and Cures of the Great
Recession' by David Beckworth from Western Kentucky University.

To be clear, the Market Monetarist's view is not that the Fed deliberately caused the Little Depression, but rather that the Fed failed to fully respond to a number of developments over the past four years that significantly raised the demand for money: the U.S. collapse in 2008-2009, the Eurozone Crisis of 2010-present, and the debt ceiling crisis of 2011. We don't see these events dramatically changing the productive capacity of the U.S. economy over this time, but we do see them increasing the demand for money and other safe assets because of the economic uncertainty they created. The Fed could have met this spike in demand for liquidity by better managing expectations about future nominal income. The Fed's failure to do so amounts to what we call a passive tightening of monetary policy and is why we view this as Bernanke's Little Depression.

So naturally, we were pleased to see the FOMC decide to do QE3, its latest round of large scale asset purchases, on a conditional basis. Doing so signals to the public that the Fed will restore nominal incomes regardless of how many asset purchases it takes. Knowing this, the public should reduce its money and safe asset holdings and in the process catalyze a robust recovery. The problem, however, is that the FOMC's definition for recovery under QE3 is loosely tied to labor market conditions. If this means stabilizing nominal wages (i.e. nominal GDP per capita) around some growth path that would be fine. But if it means explicitly targeting a real variable like the unemployment rate than QE3 has the potential to turn out badly, a point noted by Evans-Pritchard:

Modern monetarists -- or market monetarists as they call themselves -- have achieved a bittersweet victory. They have been calling for QE3 all year. They are widely credited with forcing the Fed to capitulate. Their influence is now extraordinary.

Yet the Fed is dressing up its policy shift in dubious terms. Instead of adopting a "pure" monetarist target -- say a 5pc trend growth rate for nominal GDP -- the Fed is implicitly arguing that a little more inflation is a worthwhile trade-off if it creates more jobs.

Bill Woolsey from Monetary Freedom says we are back edging back towards the `Phillips Curve' temptations of the 1960s and 1970s, which ended with stagflation and the misery index.

"Targeting real variables is a potential disaster. Expansionary monetary policy seeking an unfeasible target for unemployment was the key error that generated the Great Inflation of the Seventies," he said.

Bernanke's attempt to push down borrowing costs is at odds with monetarist orthodoxy. Woolsey argues that successful QE should cause rates to rise -- not fall -- because the goal of such policy should be to put money into the hands of businesses that then invest, spending on machinery and real expansion.

The Fed is barking up the wrong tree with its doctrine of credit yield manipulation, or "creditism", straying far from the quantity theory of money... So back the Fed's QE3 with a clothes-peg on your nose.

Evans-Pritchard is absolutely right. On one hand, QE3 could turn out to be an important turning point in the Fed's journey to NGDP level targeting. On the other hand, it could turn out bad if QE3 puts the Fed on the road to explicitly targeting the unemployment rate, as some Fed officials now want. Granted, these officials want to do so in the in the context of price stability, which for them may just be Fedspeak for saying the FOMC really needs to target the level of NGDP. But in its current form, QE3 allows enough wiggle room to make me uncomfortable. So come on FOMC, take the full plunge and adopt a NGDP level target already!

Thursday, September 20, 2012

One overlooked consequence of QE3 is that it has the ability to restore robust nominal spending not only in the United States but also in the world. This is because the Fed is a monetary superpower:

The Fed has this power because it manages the world's main reserve
currency and many emerging markets are formally or informally pegged to
dollar. As a result, its monetary policy gets exported to much of the
emerging world. The ECB and Bank of Japan are also influenced by the
Fed's decisions because they are careful not to let their currencies
becomes too expensive relative to these dollar-pegged currencies and the
dollar itself. U.S. monetary policy, consequently, gets exported to
the Eurozone and Japan as well.

This understanding helps explains why there was a global liquidity glut
during housing boom period and suggests that some of the "global saving
glut" was simply a recycling of loose U.S. monetary policy. It also
implies that the Fed could now do a lot of good
for both the U.S. and Eurozone economies if were to adopt something
like a NGDP level target. Based on this view, the global economy sorely needs the Fed to wake up from its slumber.

Well, it seems that QE3 is already beginning to shape global monetary conditions as the WSJ now reports:

Massive injections of stimulus into financial markets by the world's largest central banks are creating a domino effect around the globe, prompting governments from Brazil to Turkey to take steps to keep easy money from flooding in and driving up their currencies.

The Bank of Japan Wednesday became the latest central bank to ease monetary policy. That follows bold pledges by the world's two biggest central banks to launch open-ended programs to bolster their economies.

[...]

"All of this cash generated by the Federal Reserve is going to be entering foreign shores," said Komal Sri-Kumar, chief global strategist at TCW. "Emerging markets are going to be tempted to cut interest rates…to offset their currencies appreciating too much."

For the same reason, QE3 will also put pressure on the ECB and the Bank of England to keep easing. Now some observers like the BIS will find the Fed's loosening of global monetary conditions troubling. They shouldn't. The world currently faces a shortage of safe assets--or an excess global demand for money--that is undermining the recovery of the world economy. This shortage is also why global interest rates are depressed and the real reason why savers, investors, and financial intermediaries are suffering from the compressed yield curve.

QE3 has the potential to change this. It can raise expected future nominal incomes across the world by loosening global monetary conditions. This, in turn, should increase the demand for financial intermediation today and incentive the private sector to start
producing more safe assets. The demand for safe assets would therefore be better satiated and at the same time reduced by the increased certainty of future nominal income streams. The expected higher nominal incomes and the increased demand for credit this would create would also raise safe asset interest rates across the globe and therefore help savers and investors.

Of course, this happy ending is predicated on the Fed turning QE3 into something more explicit like a NGDP level target. Doing so would better manage nominal income expectations and allow monetary policy to pack more of a punch. Evan Soltas makes the case that just such a progression is a likely outcome. I hope so. In the meantime it will be interesting to see how QE3's influence on global monetary conditions unfolds.

P.S. George Selgin rightly warns that the QE3 as is has the potential to go very bad. That is why I want the FOMC to proceed forward to a NGDP level target. It would make the Fed more accountable, more systematic, and a better anchor of long-run inflation expectations. See Scott Sumner, Lars Christensen, and Bill Woosley for related discussion.

Friday, September 14, 2012

Still trying to make sense of QE3? Michael Darda provides some great perspective on it in this Bloomberg interview:

Cardiff Garcia of the Financial Times and Greg Ip of the Economists also weigh in on the meaning of this new program. Finally, for insights on why this program pushes U.S. monetary policy in the right direction for the long run, see piece my piece with Ramesh Ponnuru in the National Review and Scott Sumner's article in National Affairs.

P.S.Here is why conservatives should be happy about QE3. And yes, Milton Friedman would also view QE3 as a step in the right direction.

Thursday, September 13, 2012

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.... If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.

This is long-overdue and much needed. The efficacy, however, of this open-ended QE would be far more effective in shaping expectations had it been tied to an explicit target. Doing so would also make the Fed more accountable for its actions. Still, conditioning QE explicitly on the state of the economy is a vast improvement over past QEs. It also opens the door for eventually tying monetary policy to a NGDP level target. One step closer to the goal Market Monetarists have been calling for since 2009.

Tuesday, September 11, 2012

Many observers claim the Fed, through its large scale asset purchases (LSAPs) and its forward interest rate guidance, has pushed down interest rates and compressed the yield curve spread. Consequently, savers, investors, and financial intermediaries who need positive interest spreads have been harmed. It's all the Fed's fault they say. As I have pointed out before, this story falls apart because it ignores the fact that the term structure of the natural interest rate--the interest rate driven by the fundamentals of the economy--is being compressed too. That is, given the weakened state of the economy the demand for credit is down, desired savings is up, and interest rates are falling as a result. This explanation is a far better one for what we see in the following figure:

To believe the Fed is directly responsible for the low interest rates, one must believe it is capable of pushing the yield on the 10-year treasury from just above 5% to about 1.5% over a 5-year period. That gives the Fed way too much credit. This development is far easier to explain by talking about a depressed natural interest rate caused by the spate of bad economics news over this time (i.e. the 2008-2009 meltdown, the 2011 budget crisis, the ongoing Eurozone crisis). One can say, however, the Fed has failed to sufficiently respond to the heightened money demand created by these shocks and therefore has failed to stabilize aggregate nominal spending. This failure to act has allowed an economic slump to materialize which in turn has temporarily pulled down the natural interest rate. So, indirectly the Fed has been harming savers, investors, and financial intermediaries, just not in the way most observers believe.

Further evidence that Fed policies are not an important factor directly pushing down treasury yields is that Fed purchases of U.S. public debt have not been that large relative to other purchasers. In fact, the Fed's share of public debt is slightly lower than where it in the early 2000s as seen in the figure below:

The figure below shows the biggest increases in U.S. public debt holdings over the past four years have come from foreigners and individuals. Coming in fourth, after the Fed, are mutual funds. This pattern makes sense given all the negative economic shocks over this time that has elevated the demand for safe (i.e. money-like) assets.

Monday, September 10, 2012

Update: Let me clarify one point from Garcia's post. He mentions my argument that the lowering of the IOER would send a signal that the Fed is committed to a permanent expansion of the monetary base. This should not be construed to mean that lowering the IOER would create more monetary base, since that is not the case. Rather, my argument is that it would send a signal that some of the existing increase in the monetary base would become permanent. Currently, long-run inflation forecasts suggest that most observers do not expect the large increase in the monetary base to be permanent.

Sunday, September 9, 2012

Michael Woodford's speech last week has generated much discussion.1 That should not come as surprise since the speech was given at an important conference and was delivered by one of the top monetary economist in the world. While most commentators recognized the speech for what it was--a rebuke of Fed policies that have failed to reverse the shortfall in aggregate nominal expenditures and a call for a NGDP level target that would directly address it--some have misconstrued Woodford's main points. John Cochrane, with whom I often agree on issues, is the probably the most notable one. His recent post on the speech highlighted much of Woodford's critique of Fed policy, but failed to properly characterize the deeper reasons for his critique and endorsement of a NGDP level target.

Cochrane has already received pushback on his post from Scott Sumner, Bill Woolsey, and David Glasner. Here, I wanted to provide my own response to two of Cochrane's statements that highlight the divergence between his and Woodford's actual views on the efficacy of monetary policy at the lower bond and its ability to keep long-run inflation expectations anchored. Here is the first of Cochrane's statements:

Mike recognizes, as I do, that the Fed can do nothing more to raise nominal GDP today. Rates are at zero. The Fed has did what it could.

This is not Woodford's view. He is a firm believer in the power of expectations to create immediate and meaningful monetary stimulus, even at the zero-bound. Woodford makes this point very clear early in the paper:

It is important to recognize first that according to standard macroeconomic theory, people’s expectations about future policy are a critical aspect of the way in which monetary policy decisions affect the economy. The overnight interest rates (such as the federal funds rate in the US)... are not in themselves of such import for the economic decisions (about spending, hiring, and price-setting) that central bank ultimately wishes to influence. It is instead the anticipated path of short-term rates, years into the future...that is a more important determinant of these decisions... It follows from this view that, even when the current policy rate is constrained by the lower bound, a variety of different short-run outcomes for the economy should remain possible, depending on what is expected about future policy.

This is why Woodford endorsed a NGDP level target. He sees it as
a practical way for the Fed to conditionally commit to a future path of
monetary policy that would raise aggregate nominal expenditures today. To underscore this point, Woodford notes this approach would be equivalent to the Fed convincing the public that some part of the increase in the monetary base were going to be permanent, something that has not happened with the Fed's QE programs:2

If, instead, one were to assume a permanent increase in the size of the monetary
base, and assume that it is immediately understood by everyone in the economy that
such a permanent change in policy has occurred, then such a policy would be predicted
to have an immediate positive effect on economic activity during the period in which
the lower bound binds, in either the model of Krugman (1998) or Eggertsson and
Woodford (2003).

Here, the expectation of a permanently larger monetary base in the future implies permanently higher nominal spending and nominal income in the future as well. Households and firms, in turn, increase their nominal expenditures today in expectation of these future developments. A NGDP level target, then, is a way of managing expectations about the future path of the monetary base or the policy interest rate that would raise aggregate spending today. Contrary to Cochrane's claim, then, Woodford believes there is much the Fed can do but simply has failed to do so. (That the Fed could be doing more, but is not is tantamount to the Fed passively tightening. Other evidence also points to monetary policy being effectively tight)

One implication of this understanding is that the real reason for the limited success of the Fed's QE programs is not that the Fed is doing a futile asset swap of near perfect substitutes, but that the Fed has failed to appropriately change expectations with these programs. Even though bank reserves and treasury bills may be near substitutes now, they will not always be as interest rates will eventually rise. Forward-looking markets know this and would respond by rebalancing portfolios towards riskier assets if they thought yields would rise high enough in the future. The fact that portfolios have not significantly rebalanced and kick started a robust nominal expenditure recovery is an indictment that the Fed has failed to properly manage expectations about the future path of monetary policy.

The second of Cochrane's statement speaks to ability of the Fed to keep long-run inflation expectations anchored if it allows temporarily higher inflation:

More deeply, how does the Fed commit to allowing "just a bit" of inflation in the future, and not starting down the path of the 1970s again?

This concern, shared by many, is misplaced since Woodford proposes a NGDP "target path" or level target. A level target anchors long-run inflation expectations, but allows for temporary catch-up growth or contraction in NGDP so that past misses in aggregate nominal expenditure growth do not cause NGDP to permanently deviate from its targeted path. Woodford notes that currently NGDP is anywhere from 10-15% below its trend (and thus expected) growth path. Any increase in inflation under this target, therefore, would not be some ad-hoc temporary increase but part of a systematic approach that would return NGDP to its trend. I have used the following figure before to illustrates this idea:

The black line has NGDP growing at a 5% annualized rate. Then, at time t a negative aggregate demand (AD) shock causes NGDP to contract through time t+1. There is now an a NGDP shortfall. To make up for it, the Fed must actually grow NGDP significantly faster than 5% to return aggregate nominal spending to its targeted level. For example, if NGDP fell 6% between t and t+1 it is now 11% under its trend. Next period the Fed must make up for the 11% shortfall plus the regular 5% growth for that period. In short, the Fed would need to grow NGDP about 16% between t+1 and t+2 to get back to trend. There might be temporarily higher inflation as part of the rapid NGDP growth, but over the long-run a NGDP level target would settle back at 5% growth. Nominal and thus inflationary expectations would be firmly anchored. Woodford explicitly makes this point:

[S]uch a commitment would accordingly require pursuit of nominal GDP growth well
above the intended long-run trend rate for a few years in order to close this gap. At
the same time, such a commitment would clearly bound the amount of excess nominal income growth that would be allowed, at a level consistent with the Fed’s announced long-runt target for inflation.

Woodford also notes that such a rule would actually tend to reduce AD shocks since it would create well-anchored nominal spending and nominal income expectations that wold prevent such a shock from materializing in the first place:3

A commitment not to let the target path shift down means that, to the extent that the target path is undershot during the period of a binding lower bound for the policy rate, this automatically justifies anticipation of a (temporarily) more expansionary policy later, which anticipation should reduce the incentives for price cuts and spending cutbacks earlier, and so should tend to limit the degree of the undershooting. Such a commitment also avoids some of the common objections to the simple Krugman (1998) proposal that the central bank target a higher rate of inflation when the zero lower bound constrains policy.

These are all points that Market Monetarist have been making for some time, so obviously I agree with Woodford. The only difference between us is that he focuses on interest rate instrument where we focus on the monetary base. My hope is that John Cochrane will reconsider these issues.

2 Woodford further notes the equivalence in this passage: "The demonstration by Auerbach and Obstfeld (2005) that welfare can be increased by permanently increasing the supply of
base money could alternatively be used to show that welfare could be increased by
committing to keep the nominal interest rate at zero until it is possible to hit a certain
deterministic target path for nominal GDP, and then use monetary policy to keep
nominal GDP growing at a steady rate thereafter. The inferior initial equilibrium is
instead one in which nominal GDP is allowed to follow a permanently lower path,
albeit with the same long-run growth rate."

3Another benefit of returning nominal GDP to its pre-crisis trend is that it would restore nominal incomes to where they were expected to be when creditors and debtors agreed to fixed nominal contracts prior to the crisis. This would help repair household balance sheets and further strengthen a recovery.